Emergency Fund Revisited

Those of you who have been through the financial planning process with me or heard me give the “Yellow Pad Plan” presentation know that I spend a lot of time talking about the importance of building an emergency fund.  As we enter 2019, I believe it’s more important than ever to have a solid 3-6 months (or more) of your living expenses.  Why?  Here are 5 reasons:


  1. Your job can go away overnight.  There are approximately 800,000 people currently affected by the government “shutdown”, which is its 9th day as I write this and there doesn’t seem to be a quick end in sight.  Can your family budget stand to go without pay for potentially weeks or months?  What if your company closes and you’re laid off?  According to the website The Balance Careers, it takes on average one month for every $10,000 in annual income to find a new job (so if you earn $60,000, it will take you on average 6 months to find a new job).  Having the emergency fund can make all the difference during a time like that.  I can speak personally to that as well, having been through several corporate “restructurings” in my own career.


  1. A Financial Emergency Prevents You Saving for Retirement and Other Things.  According to a 2015 General Accountability Office (GAO) study, 29% of people from 55-64 have no money saving for retirement.  The average amount saved for retirement for that age group is $104,000, which the GAO says is well below what the average family will need to replace their working income.  Can you really afford to stop saving for retirement for six months if your car blows up and has to be replaced?


  1. A Financial Emergency Can Cause an Increase in Debt. An increase in debt also magnifies the length of time it takes to come back from a financial emergency.  The more (and longer) you have to pay down debt, the longer it will take you to save adequately for retirement.


  1. An Emergency Fund Can Help You During a Volatile Market.  Over the past couple of months, we’ve seen some of the most extreme market volatility, including rapid market declines as well as the largest one-day gain in the stock market in history.  If you’re nearing retirement or already retired, this type of volatility can make you extremely nervous and maybe even lead you to make some bad decisions about trying to “time the markets”.  Having more money in an emergency fund can give you peace of mind during extreme market turbulence.



  1. Peace of Mind is Worth a Lot.  It’s hard to quantify but having that emergency fund of at least 3-6 months of your expenses really gives you a sense of well being about your finances.  Frequently in the news you’ll hear commentary on “Consumer Confidence” and whether it’s high or low, increasing or decreasing.  I wonder what our country’s consumer confidence would be like if everyone had a financial cushion.  For that matter, what would it be like if our country had a financial cushion instead of an increasing deficit?  Just wondering…

As you enter 2019, I urge you to think about working hard on building that financial reserve.  There are many articles on how to do this, even if you’re living paycheck-to-paycheck.  It will take sacrifice – like selling some things you don’t really need, working an extra amount, or giving up something for a while.  In the end I believe you will find it worth the effort!